Reflecting back on 2023, what are your key takeaways as an investor?
This year companies had to align themselves to what works long-term for businesses, and what is good for both the company and the investors, and finally, the LPs (limited partners) of our funds who put their faith in India and who have invested heavily in India. Therefore, I think it was time to readjust many things, and in some cases, correct certain excesses in the ecosystem. The good part is we have emerged from this as, maybe, the hotspot globally. With all the events that unfolded this year, nothing has diminished the significance of those experiences. When I attend events in Southeast Asia, Europe, and in the US or wherever, there is interest in the country and the belief that India is the moment, transforming into a middle-income country. We have what it takes to transform. The conviction and global acceptance have been a high point for us this year.
Then finally, the depth of our entrepreneurial talent continues to surprise us. We are continuing to have more and more entrepreneurs believe that many great companies can be built over the next 10, 15, and 20 years, and we do not see a slowdown in that. India’s position, as an innovation hub, the dispersion of innovation that started from the West to the Global South is now getting concentrated and somewhat centered around India. That is a big positive. So, it’s not just that we have an economy that will grow, but we also have become a new spot for innovation, which would mean that it’s not only about domestic consumption, but it’s also about us being able to develop technologies products for the rest of the world.
What are the positives of India right now among other markets?
I think it is the public market ecosystem. When I look at many emerging countries, mostly in our global South, whether it is GCC or Southeast Asia, the public market, regulatory environment, and market maturity in India are a decade ahead of counterparts in this region. I think ultimately wealth generation for the larger mass, distribution of and democratisation of wealth which is more sustainable and more equitable, will only happen if you have millions and millions of new aspirational people who come into the ecosystem and participate in that nation-building and one of the big ways to do that is through public markets. There is some trickle-down effect. When wealth is created at the top, you do not structurally see that in many other countries, there is no strong participative capability for the masses in the economic growth that is happening in those countries.
The public market opens up a window of opportunity for private investors, especially at a time when India continues to be criticised for not being able to offer great exits. Your thoughts?
The thing that we do forget is that we are 15 years old; you have to take the Flipkart moment, as really when we started to build companies at scale. Therefore, there were multiple venture cycles before that. Most of them failed cycles in India. Sometimes, when investors and global LPS go into markets, they cannot time them. There were a couple of cycles in the mid-90s and late 2000, which did not play out for venture investors in the country. I think, we were not ready on multiple fronts. However, it is Flipkart and post that the mobile revolution and enough good talent coming into the entrepreneur ecosystem that changed things and that is around 15 years old. If all things go well, in terms of political stability, and some of those things that we expect that just think of money going back, for LPs for investors from India, we should see that 2024-25 is a very big momentum and, and that can create a China of the late 1999-2000 moment again. We should not get ahead of ourselves; we need 5-10 good IPOs. However, if you have five good IPOs and investors witness the return of funds, there is potential for a significant shift in the landscape.
But with so much dry powder waiting to be invested, will the cycle turn in 2024?
I think there is capital adequately available, at least for the India opportunity. Over the next two to three years, we will see $15 billion of dry powder being invested. I think there has been a nice 20-30-40% correction in valuations and the deal volumes have not gone down. I think there has been a right sizing of the valuations having a series A round or a seed or a pre-seed round, be of the right size, and have the right valuations. I do not want to see that change. I think where we need more capital is at the growth stage. But I think what we should see, and hopefully we’ll see a bit more of is focused pools of capital come in for early growth and create that entire spectrum, which is very different from the capital that was there because it was there for a different class of companies.
Private equity did participate and their outlook is optimistic. While they may not have had the same level of confidence in the sectors currently thriving, their contribution is still welcomed. Their capital has played a crucial role in filling the gap for growth capital this year. Indian growth investors came in late to the party but did not come in at the right price. In the next two-three years, there will be concentrated, India-only growth pools of capital for both mid-stage and late-stage.
Will more pools of capital competing to invest drive prices back to the 2021 levels?
Competition is always there in sectors that are widely understood and familiar to everyone but those are not the areas for substantial profits. Those are yesterday’s opportunities, not the ones shaping tomorrow. At Accel, we have a set of prepared minds where we rejig and reassess spaces every four to five years. The spaces we observe from a higher-level perspective are at least four or five years away from being impactful. It is essential to read and venture into spaces that can become very large, have global relevance, and have domestic tailwinds. These are the spaces that entrepreneurs are already planning for but they need investors like us who have insight into the outlook of the sector.
It is crucial to recognize the significance of deliberately pausing and reflecting, especially during shifts like those in AI, vertical AI, and SaaS products.
How have things changed in the last two years?
What happened in the last two to three years is that the fundamentals were not being adhered to and models were being built without understanding. I will give you another example of this whole India thing. It was just fashionable to say that a company had a 2,000-member tech team. However, questions arise about the actual productivity and whether they were genuinely contributing to the business vision. The underlying economic model of the company remained unclear. Spending an additional 300% to support a team in a company without a clear final value raises concerns about the use of resources and the overall impact on the company’s value. I think that correction has happened. Therefore, that is the kind of realignment of the investor, the board, and the entrepreneur; all of them have concluded that was a phase where we did things out of our understanding of what was real tech for India and the necessary and sufficient tech and not tech for the sake of tech. I think we have gone through a great learning, and I think that is wonderful.
But a lot of this bad behavior was overlooked by investors during the heydays. Where does the onus lie?
It is challenging for a single investor to independently influence decisions at the board level. Moreover, from a philosophical perspective, there is a tendency for short memories, where everyone gets caught in the momentum and the desire to be on the right side of things. In such scenarios, at Accel, we acknowledge the need to face reality. We aspire to maintain a reputation for a balanced approach, serving as a steady and thoughtful influence. Our goal is to be recognized as a prudent sounding board, combining optimism with caution. As we look ahead, I am optimistic that this mindful approach will not be easily forgotten. We anticipate a new bull cycle where everything unfolds according to plan. Two years from now, we might find ourselves having a similar conversation, acknowledging that the Sensex value and start-up valuations have reached unprecedented levels. There is a possibility that, within the next six to eighteen months, India could experience significant economic growth, leading to an influx of money once again. I think it is this ten-year decadal cycle that people seem to have a loss of memory because also a lot of change in guard takes place in terms of who’s in control and who’s dishing out the money. In addition, we will all be better parents in the next few years. I think, the good news is that there is a gatekeeper here, which is the public market.
Lastly, what are you spending time on? Deploying new capital or portfolio management?
It is a balanced approach for us at Accel. While we are about exploring novel ideas and venturing into new territories, I believe we hold an equal or even greater responsibility to our LPs who have waited for liquidity from India.
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Published: 28 Dec 2023, 06:26 PM IST